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What do and don't we know about why countries grow?
- 4. Congo, Dem. Rep. 99 297 Burundi 111 354 Guinea-‐Bissau 128 497 Eritrea 147 584 HaiA 410 1088 Guinea 417 1113 Bangladesh 462 1233 Kenia 464 1470 Cape Verde 1632 3239 Turkmenistan 1705 6138 Ecuador 1746 7402 Guatemala 1893 4367 Chile 6229 13370 Mexico 6591 13407 CroaAa 6796 17219 Czech Republic 7632 23341 Market Prices PPP GDP Per Capita (1/2) in USD $ Poorest x4 x4 x4
- 5. USA is 387 Ames richer than DR Congo (or 145X in PPP terms) Australia 24401 33369 Belgium 25055 33520 Germany 25420 33665 Canada 26143 36039 Hong Kong 34587 40599 Switzerland 37789 37780 United States 38206 43179 Japan 40481 31484 PPP Richest x4 Market Prices GDP Per Capita (2/2) in USD $
- 6. CumGDPi 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 India China USA Bangladesh Pakistan Nigeria Indonesia Egypt Brazil Mexico Russia Japan Germany France UK Italy CumulaAve world populaAon CumulaAve world income Korea Global Income DistribuAon
- 7. Would you rather be rich in a poor country, or poor in a rich country? (credit to Dani Rodrik) Norway’s poorest 5% has a representaAve income of ~$13K In Niger, the richest 5% of the populaAon has a representaAve income of ~$2K
- 8. WHAT’S BEHIND GROWTH? income institutionsintegration geographyexogenous partly endogenous endogenous endowments productivity Source: Dani Rodrik
- 10. HUMAN CAPITAL
- 11. Robert Solow, Nobel Prize in Economics 1987 • Solow developed one of the most influenAal economic growth models. • Income growth based on factor accumulaAon is a transiAonal phenomenon, as countries move toward a “steady state”. No growth in the long run without technological advancement. • Convergence: poorer countries grow faster than richer countries, as they “catch up” capital accumulaAon.
- 12. Years of schooling and income per capita 1965-‐2005 France 1985 US$ 21315 Mexico 1993 10544 Ghana 1998=1015 GDP per capita in constant dollars, logs Thailand 2005 US$ 6751 Mexico 2005 US$ 12593 France 1993 US$ 24430
- 13. WHAT’S BEHIND GROWTH? income institutionsintegration geographyexogenous partly endogenous endogenous endowments productivity Source: Dani Rodrik
- 14. WHAT’S BEHIND GROWTH? institutions
- 15. • “Institutions are the humanly devised constraints that shape human interaction in a society” (North, 1990) • Daron Acemoglu (MIT) and his co-authors have pioneered the theory of institutions as the main input for economic growth: • Countries are less developed where colonizers created “extractive” institutions (i..e. LAC, Africa) • Corruption, lack of trust, type of “culture”, doing business, regulations, bureaucracy, social capital, etc. • Markets require (proper) institutions to work. In their absence, markets cannot work.
- 16. AGO ALB ARG ARM ATG AUSAUT AZE BDI BEL BEN BFA BGD BGR BIH BLR BLZ BOL BRA BWA CAF CAN CHE CHL CHN CIV CMR COG COL COM CPV CRI CYP CZE DEU DJI DMA DNK DOM DZAECU EGY ERI ESP EST ETH FIN FJI FRA GAB GBR GEO GHA GIN GMB GNB GRC GRD GTM GUY HKG HND HRV HTI HUN IDN IND IRL IRN ISL ISRITA JAM JOR JPN KAZKEN KGZKHM KNA KOR LAO LBN LCA LKALSO LTU LUX LVA MAR MDA MDG MEX MKDMLI MLT MNG MOZ MRT MUS MWI MYS NAM NER NGA NIC NLD NOR NPL NZL PAK PAN PERPHL PNG POL PRT PRY ROM RUS RWA SAU SDN SEN SGP SLBSLE SLV SVK SVN SWE SWZ SYC SYR TCD TGO THA TJK TKM TON TTOTUN TUR TZA UGA UKR URY USA UZB VCT VEN VNM VUT YEM ZAF ZAR ZMB -2-10123 2.5 3 3.5 4 4.5 5 LYPPPK est. Rule of Law Fitted values GDP per capita (log)
- 17. WHAT’S BEHIND GROWTH? income institutionsintegration geographyexogenous partly endogenous endogenous endowments productivity Source: Dani Rodrik
- 18. WHAT’S BEHIND GROWTH? integration
- 19. Trade: • Opening to trade allow us to import what we are not good at, and export what we are good at. • Most productive firms survive, allowing for “reallocation” of resources to more productive activities. Foreign Direct Investment (Capital): • More productive firms arrive, “spilling” their productivity to domestic firms. Migration: • Allows for easier trade and capital flows • Boost knowledge diffusion across countries boosting productivity
- 20. • By 1960, migrants made up 2.63% of the global populaAon, whereas exports of goods and services accounted for 12.7% of global GDP. • By 2010, these numbers were 3.11%and 28.19%, respecAvely.
- 21. WHAT’S BEHIND GROWTH? income institutionsintegration geographyexogenous partly endogenous endogenous endowments productivity Source: Dani Rodrik
- 22. WHAT’S BEHIND GROWTH? geography
- 23. How geography correlates with income? • Climate defines endowments and type of activities poor countries could made in the past (agriculture) • Being landlocked (or far away) reduces integration. • Some diseases are more prevalent in tropics (i.e. malaria), affecting productivity • Knowledge tends to diffuse very locally
- 24. STP ECU UGA GAB KEN SGP KIR RWA MYS BDI GNQ CMR MDV COG ZAR CAF SYC COL BRN GHA SUR IDN TGO TZA LBR BEN GUY CIV FSM LKA SLE TMP AGO PAN ETH NGASLB PNG GIN CRI VEN TTO KHM DJI COM GNB GRDPER NIC TCD BFAMLI VCT GMB NER SLV THA WSM MWI LCA HNDPHL GTM SEN CPV DMA ERI YEM ZMB SDN BRA ATG BLZ KNA VUT JAM LAO FJI MRT DOM HTI MDG BOL MEX MUS VNM TON HKG MAC NAM BGD SAU BWA PRY ZAF MOZ SWZ BTN NPL IND LSO EGYJOR ISR LBYCHL SYR PAK LBN MAR ARG URY CYP AUS IRN JPN MLT TUNDZA KOR GRC TJK PRT USA CHN TUR ARM AZE ESP UZB ALB GEO ITA MKD BGR KGZ BIH NZL ROM CAN HRV SVN CHE MDA HUN MNG SVK AUT FRA LUX CZE UKR BEL KAZ GBR POL NLD DEU IRL BLR LTU DNK RUS LVA SWE EST NOR FIN ISL 67891011 0 20 40 60 Absolute Latitute lnyppppc Fitted values Source: WDI (2008) Absolute Latitude Vs. Ln GDP PPP Per Cap
- 25. Knowledge intensity Distance between HQ and Subsidiary Knowledge intensity Distance between HQ and Subsidiary Source: Bahar, D. “Heavier than air? Knowledge diffusion within the mul7na7onal firm” (2015) Knowledge travels short geographic distances: even within a large MNC
- 26. WHAT’S BEHIND GROWTH? income institutionsintegration geographyexogenous partly endogenous endogenous endowments productivity Source: Dani Rodrik
- 27. WHAT’S BEHIND GROWTH? productivity
- 30. IGNORANCE A measure of our OWN Moses Abramovitz (1956) “ ”
- 31. Technology Management Resource ReallocaAon within and between firms
- 32. Productivity Knowing how to do more with the same resources
- 35. P R O D U C T S C O U N T R I E S
- 36. C O U N T R I E S P R O D U C T S
- 38. If you have only one letter… … there aren’t many words to write.
- 39. If you have three letters… You can write:
- 40. Now you have four letters… You can write:
- 41. Think about all the words you could write with: You could write 595 words, such as:
- 42. The more letters you have, the more new words you can write with any extra letter… … and longer words
- 43. Fraction of the alphabet available FractionofProductsthatarefeasible Increasing returns to accumulating letters
- 44. We measure accumulated knowledge based on the products a country exports Accumulated knowledge (“# of letters”) IncomePerCapita
- 46. Why so few countries develop? How come knowledge does not diffuse immediately from place to place?
- 47. Knowledge has a large tacit component. Michael Polanyi (1966) Channels for knowledge transmission are limited to human interaction Kenneth Arrow (1969)
- 48. Knowledge is hard to transfer and hard to acquire
- 51. Productive knowledge is also tacit
- 52. Countries face the “chicken and egg problem” • You cannot make watches without watchmakers • You don’t want to be watchmaker if nobody makes watches • You cannot become a watchmaker because there are not watchmakers to learn from • How does the world deal with this? • By moving towards products that “share” knowhow and knowledge
- 53. ELECTRONICS MACHINERY AIRCRAFT BOILERS SHIPS METAL PRODUCTS CONSTR. MATL. & EQPT. HOME & OFFICE PULP & PAPER CHEMICALS & HEALTH AGROCHEMICALS OTHER CHEMICALS INOR. SALTS & ACIDS PETROCHEMICALS LEATHER MILK & CHEESE ANIMAL FIBERS MEAT & EGGS FISH & SEAFOOD TROPICAL AGRIC. CEREALS & VEG. OILS COTTON/RICE/SOY & OTHERS TOBACCO FRUIT MISC. AGRICULTURE NOT CLASSIFIED TEXTILE & FABRICS GARMENTS FOOD PROCESSING BEER/SPIRITS & CIGS. PRECIOUS STONES COAL OIL MINING
- 54. The process of development • Involves accumulating more letters (knowledge) • …and expressing them in more words (products) • …and in longer words (more complex products)
- 55. In a perfect world… … innovators have access to all inputs (letters)!
- 56. Emerging markets… …tend to have many missing letters, and many “chicken and egg” problems
- 57. Ghana GDPpc in 1960: ~USD 180 Thailand GDPpc in 1960: ~USD 100 Vs
- 58. No differential trend in years of schooling…
- 63. Ghana’s “Product Space” in 1962
- 64. Ghana’s “Product Space” in 2013
- 65. Thailand’s “Product Space” in 1962
- 66. Thailand’s “Product Space” in 2013
- 67. Our research suggests that not only the “quanAty” of exports ma^er, but rather the knowledge and knowhow embedded in the export basket…
- 68. Δ
- 69. Vs01000200030004000 GDPpercapita(constant2005US$) 1960 1970 1980 1990 2000 2010 Year Ghana Thailand
- 70. South Korea: An Asian “Tiger”
- 71. 1965
- 75. See more at hlp://atlas.cid.harvard.edu/
- 76. “Knowledge and skill diffusion is the key to overall producAvity growth as well as the reducAon of inequality both within and between countries” (Pike^y 2014)
- 78. .38.4.42.44.46.48 CPS_Gini −5 0 5 10 15 20 Time from MDP Establishment Winner Loser 15 years down the line, the average “winner” county ranks 0.02 points lower in the Gini coefficient, across all MSAs Source: Bahar, D. “TTes7ng Pike>y: A natural experiment on knowledge diffusion and inequality dynamics in America”, (2015)
- 79. A framework to think on solving problems in developing countries…
- 80. wtf?
- 82. Market failures that stop the “invisible hand” • Unequal access to economic resources (i.e. credit, full information, risk uncertainty) • Social and private returns differ, externalities (i.e. pollution, workers’ trainings, etc.) • Institutional failures (e.g. corruption, too much or too little regulation, etc.) • Poor macroeconomics (e.g. inflation or deflation) • Coordination failures (e.g. lack of infrastructure, lack of complementary markets)
- 83. • A good solution understands the market failure (the cause) and not solves only a symptom • For example: Why should the gov’t subsidize entrepreneurs? Why can’t entrepreneurs raise money? • The solution must provide the proper incentives, b/c otherwise it wont work! • Does providing mosquito nets help reducing malaria?
- 84. • How to determine what the market failure is? Ask questions like: • What is the structure of incentives that generates this problem? • Why hasn’t the private sector done this yet? Are the ones who overcome this failure are rare? • Will the solution change the incentives to achieve the goal? For effective policy, our work to ask the “wtf” question, and why is this solution addressing the cause of the problem and not only a symptom.
- 86. RCTs Plan your own pilot!
- 87. Thank you For further questions or suggestions, email or follow me at: db21@post.harvard.edu @dany_bahar